Acadian Asset Management - Q4 2022

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by. Welcome to BrightSphere Investment Group earnings conference call and webcast for the Q4 2022. During the call, all participants will be in a listen-only mode. After the presentation, we will conduct a Q&A session. To be added to the queue, please press star one on your telephone keypad. If you need to reach out to an operator, please press star zero. Note this call is being recorded today, Thursday, February 2, 2023 at 11:00 A.M. Eastern time. I would now like to turn the call over to Elie Sugarman, Head of Strategy and Corporate Development. Please go ahead.

Elie Sugarman (Head of Strategy and Corporate Development)

Good morning. Welcome to BrightSphere's conference call to discuss our results for the Q4 ended December 31, 2022. Before we get started, please note that we may make forward-looking statements about our business and financial performance. Each forward-looking statement is subject to risks and uncertainties that could cause actual results to differ materially from those projected. Additional information regarding these risks and uncertainties appears in our SEC filings, including the Form 8-K filed today containing the earnings release, our 2021 Form 10-K, and our Form 10-Q for each of the first, second, and Q3s of 2022. Any forward-looking statements that we make on this call are based on assumptions as of today. We undertake no obligation to update them as a result of new information or future events. We may also reference certain non-GAAP financial measures.

Information about any non-GAAP measures reflected, including a reconciliation of those measures to GAAP measures, can be found on our website along with the slides that we will use as part of today's discussion. Finally, nothing herein shall be deemed to be an offer or solicitation to buy any investment products. Suren Rana, our President and Chief Executive Officer, will lead the call. Now I'm pleased to turn the call over to Suren. Suren?

Suren Rana (President and CEO)

Thanks, Elie. Good morning, everyone. Thank you for joining us today. As usual, I'll start off with the financial highlights on slide 5 of the deck. For Q4 2022, we reported our highest ever quarterly EPS without NRI of $0.67, 26.4% higher than $0.53 that were reported for Q4 2021. Our sizable share buyback in Q4 2021 and Q1 2022 more than offset the drop in our earnings from the significant equity market decline in 2022 and the resulting impact on our AUM. We are pleased that throughout this volatile market environment, our investment performance has continued to be strong. As of December 31, 2022, 88%, 87%, 87%, and 90% of our strategies by revenue beat their benchmarks over the prior one, three, five, and 10-year periods, respectively.

We also reported second straight quarter of positive net client cash flows with $1.3 billion of net inflows as we saw robust sales across a few different strategies. Our sales pipeline remains healthy with ongoing searches across a range of strategies. Turning to capital management, we had a cash balance of $108 million as of December 31, 2022 after funding $15 million of seed capital for Acadian's Equity Alternatives platform and fully paying off Acadian's seasonal credit facility. Acadian generally draws on this facility in the Q1 for one, two seasonal needs, and they fully pay it off over the course of the year. As our business continues to generate strong free cash flow, we expect to continue deploying capital to support our organic growth and to buy back shares whenever opportunities come up. Turning to some highlights for Acadian on slide seven.

Acadian generated $50.9 million of adjusted EBITDA in the Q4 of 2022, compared to $87.6 million in the Q4 of 2021. The drop in EBITDA compared to 4Q of 2021 was mainly driven by the approximately 20% decline in AUM over the last 12 months due to equity market decline globally and lower performance fee than last year. Turning to slide 11 for a minute as a reminder overview of what Acadian's capabilities are. The top two rows, equity and Managed Volatility, have historically been Acadian's core capabilities. That's where most of our AUM resides currently. The bottom four rows represent the growth initiatives underway. These are all large and growing markets where Acadian's systematic approach is particularly suited to serve this demand.

As a quick update on these initiatives, we continue to build out Acadian's efforts in Systematic Credit, with the core investment team now mostly in place. We continue to add to the investment model and data and technology infrastructure. We expect to start investing in this strategy in the H2 of 2023 with seed capital. We kick-started Acadian's Equity Alternatives platform in Q4 with $15 million of seed capital. Have now started to build a track record here. We continue to make further progress of Systematic Macro with ongoing traction with clients and additional buy rating from consultants. We continue to see more investment mandates focused on Responsible Investing. All these initiatives tap into secular growth markets. Over time, we expect them to help generate sustained organic growth for Acadian.

To conclude with our long-term strategy on slide 15, we will continue to invest in our core capabilities and leverage our unique quant platform to expand into new areas. We will continue using our free cash flow to support organic growth and for share repurchases whenever opportunities are available. We remain focused on maximizing shareholder value. Now, let me turn the call back to the operator. Happy to answer questions at this point.

Operator (participant)

At this time, those with a question should lift their phone receiver, press star followed by the number one on their telephone keypad. To cancel a question, press star one again. Our first question comes from Glenn Schorr with Evercore.

Glenn Schorr (Senior Managing Director and Senior Research Analyst)

Hi. Thanks very much. I'm very curious on some of the new build-outs. You talked about the team mostly being in place in Systematic Credit. One is that the case for Equity Alternatives as well? At the highest level, I'm curious of what you see the differences between systematic equity and Systematic Credit from process standpoint, and why would Acadian just be getting around to it now? It does seem like a big opportunity. It's just it's not as big in the marketplace. Curious if you could talk to those two things. Thanks.

Suren Rana (President and CEO)

Yeah. How you going? Thanks. Yeah, you're right. The team, you know, the core team, at least in both these areas is mostly in place. You know, there are about, you know, 8 to 10 people in both strategies. There'll be more people added as we go in select areas, in data et cetera. The core team is mostly in place. What's happening now is we continue to add more infrastructure, more trading infrastructure, more data infrastructure, particularly in credit. The Equity Alternatives is a little bit ahead as I mentioned earlier. We've already seeded it, and the seed capital is being invested, and we're building a track record here. Credit, you're right.

You know, it is a big opportunity, you know, at least as large as equity is. It is a market that is it is quant driven, so our unique quant capabilities would have an advantage here. What's come along over the past few years, clearly this market was a voice market, you know, over the phone market, not as much electronic trading. That's changed a lot. So there's more and more electronication of trading here, and that has also in turn led to more data being available. So that's made this market, you know, I would say more, you know, more for the taking now for Acadian.

Secondly, it's also as our data has built up, you know, we can leverage a lot of that for credit. It is similar kind of analysis as you know. We can leverage a lot of that data. There's also we'd been on the lookout for a good team for a while. That's critical, you know, that's the right fit, people who are, who have the same systematic quant mindset, but also have credit experience. We were fortunate to really find, as we announced, you know, a few quarters ago in Scott Richardson, really one of the pioneers in quant credit, who brought on more people with deep experience in the area.

It's really just a lot of things coming together at the right time, which is, which is a bit of a coup.

Glenn Schorr (Senior Managing Director and Senior Research Analyst)

Great. Appreciate all that. Thanks.

Operator (participant)

Our next question comes from Kenneth Lee with RBC Capital Markets.

Kenneth Lee (Managing Director)

Hi. Good morning. Thanks for taking my question. Doesn't sound like you repurchased any shares in the quarter. Wondering if you could just comment on any discussions you may have had around potential value enhancing transactions. Thanks.

Suren Rana (President and CEO)

Hi, Ken. Yeah, it is correct that we haven't purchased any shares in the quarter. We of course don't specifically comment on any conversations, but yes, from time to time we are, you know, in blackout windows, either as we mentioned during earnings blackout windows, but also if we have any, you know, any non-public material conversations.

Kenneth Lee (Managing Director)

Gotcha. One follow-up, if I may. Wanted for you to talk a little bit more about the, you know, key drivers for the performance fees you saw in the quarter. I think in the past you've mentioned that some products were

Above their high watermarks, and then, it could've been a favorable setup. Just wondering if that was a factor as well from any other drivers there. Thanks.

Suren Rana (President and CEO)

Yeah, yeah. Last year was definitely, as you alluded, you know, it was a bit of a loaded base. You know, and you know, so that was unusual that things were set up correctly. This year also, the performance in many of the accounts was good and we ended up at I think at a decent place. What we got last year was clearly very high in the record. Hopefully we can get that again at some point, but it is up there. This year we had good performance, and we got performance fee from some of the accounts that were eligible.

Clearly the setup last year, was favorable, than this year, and we're happy with what we got this year.

Kenneth Lee (Managing Director)

Gotcha. Very helpful there. Thanks.

Operator (participant)

Our final question comes from Michael Cyprys with Morgan Stanley.

Michael Cyprys (Managing Director)

Great, thanks. Morning. Was hoping you might be able to elaborate a bit more on the sales pipeline. How's that look today versus a year ago? If you could maybe comment on some of the strategies you're seeing strengths as well as the customer channels as well, where you're seeing more strength and maybe even on from a geographic standpoint too. Thank you.

Suren Rana (President and CEO)

Yeah. Thanks, Michael. you know, we are seeing, generally it's a very healthy pipeline, you know, in terms of comparing historically. Yeah, compared to historical levels, it's at a healthy level. We're seeing searches across a range of strategies, including our flagship strategies like Global Equity, Emerging Markets, even Managed Volatility, which we talked about, you know, maybe a year ago, was out of favor. We're seeing searches there. In our newer strategies like the Multi-Asset Class, you know, all countries, non-U.S. as well. That's, it's a pretty good, in a broad, you know, broadly diversified pipeline. We're seeing, maybe about a fourth of the strategies have some kind of sustainability angle to them as well.

We're seeing more and more ESG type of searches as well. That's all encouraging to see. Geographically, I guess, no, not much. Of course, as you know, you know, a lot of our AUM currently is within the U.S., and non-U.S. clients represent a growth area for us. And we are trying to do more of that, but it is in line with our. The current search pipeline is in line with historical levels. Does that cover your question, Mike?

Michael Cyprys (Managing Director)

Yes. Thank you. Thank you. Maybe just a follow-up, if I could, just on expenses. Hoping you could maybe elaborate a bit around your expectations for expense growth next year. Saw you put out the guidance on the variable comp and the affiliate distributions and the operating expense guidance. Maybe you could just elaborate a bit on kinda what went into those ranges, how you thought about that, and what's sort of underpinning it around market performance expectations. Are you baking in a strong start to the year that's already been playing out in equity markets, or would that be sort of upside?

Suren Rana (President and CEO)

Yeah, in our, in our guidance, I guess, you know, we put this together relatively recently, so it does factor in all that we know, you know, currently. It reflects essentially, yeah, where the market is today, we are going to invest more in these new initiatives that we touched on earlier, you know, on people as well as data and infrastructure, on credit, Equity Alternatives, Multi-Asset Class, ESG, all of these areas. It reflects the investment in addition to P&L there. It reflects some inflation as well. You know, assuming, of course, more the ratios can change depending on if the markets were to change significantly.

In the normal range, we should end up within our guidance.

Michael Cyprys (Managing Director)

Great. Thank you.

Operator (participant)

This concludes our question and answer session. I'd like to turn the conference call back over to Suren Rana.

Suren Rana (President and CEO)

Thank you, operator. Thank you, everyone, for joining us this morning. We appreciate it. Thank you.